New York City Tests Social Impact Bonds

The city will be the first in the nation to test the experimental financing model for social programs.

Following in the footsteps of the United Kingdom and then Massachusetts, The Economist reports that New York City is the first municipality to test social impact bonds -- an experimental financing method that reverses how traditional government funding works and allows governments to take less risk with taxpayer money.

Instead of paying for a social program upfront, these bonds allow government agencies to contract with private investors and nonprofits to secure the initial funding. The government is only required to reimburse contractors if the program meets certain measurable success rates.

In New York City, Wall Street giant Goldman Sachs is fronting $9.6 million for the Adolescent Behavioral Learning Experience -- a program that uses cognitive behavioral therapy to help reduce the re-incarceration rate for juveniles at Rikers Island jail. If the rates drop by ten percent, then the city will pay Goldman back all of the money it invested. If they fall by an even greater margin, the city will pay Goldman a bonus, resulting in a profit for the company.

But because New York City Mayor Michael Bloomberg believes so strongly in the pay-for-success approach, he has agreed to use funds from his philanthropy to guarantee $7.2 million of the loan, according to The Economist.

Massachusetts is the first state to experiment with social impact bonds, as detailed in an earlier Governing feature.